JOURNALS OF ROBERT MAAS

Monday, December 18, 2017

A CHRISTMAS STORY

Do you think we have a fair tax
system? Government Ministers and HMRC
officials keep telling us we do, but I’m not so sure myself. As it’s near Christmas, I thought I’d tell you
a story.

Are you sitting comfortably? Then let us begin. Once upon a time in a far away country called
Ghana a kind teacher called Freda decided to set up a nursery school. It was very successful and in 2008 she
decided to expand the nursery school.
She mentioned this to her daughter (who lived in England) when the
daughter came on a visit to Ghana.
Returning home to England the daughter told her husband Edwin, who had also
come from Ghana. Edwin had bigger
ideas. He volunteered to help Freda
create a private school to take pupils right up to Junior school level. He saw the project as his chance to give
something back to the country of his birth.
Edwin entered into a partnership with three other people to create the
school. He put in £21,000 of capital and
collected money from others to support the school. By September 2009, it was clear that the
school needed much more money than had been raised but Freda and other family
members had become unhappy with Edwin’s “hands on approach” to the school and
were losing interest. When it opened, it
attracted only nine pupils, had difficulty hiring teachers and quickly
collapsed. Edwin and everyone else lost
their investments.

Some of you are probably thinking that
Christmas stories ought to have happy endings.
Others may think what’s that got to do with fairness and tax? So I’ll tell you Edwin’s story too. Edwin had a job in IT. Indeed, he had two jobs. When he started the school project, he was
employed by a large IT company, TPI Eurosourcing. However, he had previously worked for a
smaller one, Mphasis, and continued to do a bit of freelance consultancy work
for Mphasis because he hoped that as they grew, they would want him to work for
them again. Edwin wanted to keep his
Mphasis fees separate from his TPI salary so decided to open a second bank
account. Sadly, he had a poor credit
rating but his brother agreed to open an account at Barclays in his own name
and let Edwin run the account. Edwin did
not look at that account very often as he did not do a lot of consultancy work,
but when he started to collect money for the school, he put it through the
Barclays account. Edwin’s self-employed
earnings for 2009/10 were fairly low.
This prompted HMRC to open an enquiry into his tax affairs. That’s obviously fair. If someone is self-employed and he cannot
live on the income he declares, he is obviously understating his tax. It would clearly not be reasonable for HMRC
to look at the rest of his return and see that he had a full-time job elsewhere
so his consultancy income was unlikely to be significant. (Sorry, as its almost
Christmas I must try harder not to be so sarcastic).

“Ah ha”, thought Mrs Scrooge, the HMRC
Officer (not her real name). “If I add £20,900 to the declared income, the
total comes to a much more reasonable figure for someone to live on”. So Mrs Scrooge invited Edwin and his
accountant to a meeting to explain why they thought the £20,900 should not bear
tax. Edwin produced a letter from his
father in Ghana saying he had lent Edwin £14,169. He produced a letter from Mr Eze Oke in
Nigeria saying that he had lent Edwin £14,160 towards a school in Ghana. He produced a letter from Freda saying that
she had received 117,000 Ghana Cedis from Edwin towards the building of the
school. He produced a letter from a firm
of solicitors in Ghana saying that they had been instructed to draw up the
partnership agreement for the school.
Unfortunately the figures in the letters did not reconcile with the
amounts in the bank account though.

“Not sufficient”, said Mrs Scrooge. “Where are the loan agreements”. Sadly there were none. Perhaps in Ghana people trust their friends and
relatives whereas in England of course no one would dream of lending money to
their son without instructing a solicitor to draw up a loan agreement
first. (That doesn’t sound right. I’m English and over the years I’ve lent
money to lots of people, never thought of asking for a loan agreement and have
always been repaid. So perhaps HMRC
families operate differently, as had I been Mrs Scrooge, I certainly would not
have expected there to be loan agreements).

In any event, Mrs Scrooge then, I
assume, explained how the fair English tax system works.

1.She decides that
£20,900 paid into a bank account set up to bank freelance earnings is likely to
be income in the absence of any proof to satisfy her otherwise.

2.It is then for
Edwin to prove it is not income.

3.HMRC use a principle called the “assumption of continuity”. This enables Mrs Scrooge to assume that if
Edwin had undisclosed earnings of £20,900 in 2009/10, he would have similar
undisclosed earnings in 2008/09, 2010/11 and 2011/12, a total of £83,600
undisclosed income.

4.Edwin has
deliberately omitted the £20,900 from his tax return as he did not regard it as
income. Deliberately omitting income is
very serious. Accordingly in addition to
the tax on the £83,600, Mrs Scrooge wanted a penalty equal to 54.25% of that
tax.

Assuming income tax at 40%, that meant
that Mrs Scrooge wanted Edwin to pay £51,582, because he had not proved to her
that the £20,900 was not income. Does
that sound fair to you?

Edwin appealed to the tax Tribunal. HMRC told the Tribunal that the law says that
if there remains any uncertainty in the judge’s mind, then Edwin will not have
discharged the burden of proof, so must find against Edwin and give HMRC their
£51,582 of flesh. “Wrong”, said the wise
judge. “Edwin has only to show that it
is more likely than not that the £20,900 was to build the school”. “He struck us as a straightforward and
reliable witness”, they said. “We take
account of the discrepancies in the figures.
But we also take into account that the type of IT work he does is not
compatible with offering services to individuals on an ad hoc basis. We also do not think that the fact that
someone opens a separate bank account for his consultancy income creates a
presumption that everything in that account is income. We think that Edwin has demonstrated to our satisfaction
on the balance of probabilities that the £20,900 was not undeclared taxable
earnings”.

So there’s the Christmassy happy
ending. They all lived happily ever
after (probably) – well, possibly except for Mrs Scrooge who might have got a
bonus for creating £51,852 for HMRC out of £20,900 of non-taxable receipts, but
I suspect she feels there are plenty of other taxpayers to be fleeced so what’s
one defeat. If so, she is probably
right. Many people are scared of going
to the Tax Tribunals, so I suspect most people in Edwin’s position pay up.

Oh, and while the assumption of
continuity is a concept that has been endorsed by the Appeal Tribunals, it is
one that applies only where the omissions are of a type that is likely to
recur, which was not the case with Edwin’s receipts (even if they had been
income).

So congratulations to Edwin (for the
technically minded, he is Edwin Bekoe (Case TC 6181)) and to his accountant for
this well-deserved victory. And a happy
Christmas to all my readers.

Monday, December 11, 2017

TAXING THE DIGITAL ECONOMY

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TAXING THE DIGITAL ECONOMY

One of the documents the government
published on Budget day was a Treasury Position Paper on “Corporate tax and the
digital economy”. I have just finished
reading it. To be honest, I did not find
it at all convincing or, indeed, very logical.
However I think it important because it sets out the Treasury’s
justification for the Chancellor’s new withholding tax on royalty payments and
its thinking on taxation in the digital world.

It starts with a statement of
principles. “The important question when
applying corporation tax to a multinational group is what amount of profits
should be taxed in the UK compared with the other countries in which the group
operates. The answer to that question is
currently determined by an international tax framework which was developed in
the early 20th century … The
overall principle underlying that framework is to tax a multinational group’s
profits in the countries in which it undertakes its value-generating
activities. That is a principle that the
government continues to support. It does
not, for example, believe that another country should have a general right to
tax profits that a UK business generates from a product that is designed in the
UK, manufactured in the UK, marketed in the UK and then sold remotely to that
country’s customers … Instead countries
should have the right to tax business profits derived from productive
activities, enterprise and human innovation in their jurisdiction, irrespective
of where shareholders and customers are located”.

So far, so uncontroversial – or, at
least, nearly so! The international tax
framework actually is that a country can tax the profits generated worldwide by
its own companies (but in doing so should give credit for tax paid on those
profits elsewhere) and can also tax profits made in its country by foreign
entities that have some form of business organisation in its country (such as a
branch). Even then it should only tax
the profits derived from that branch. In
determining what profits are derived from a branch, the host country will take
account of productive activities, enterprise and human innovation of that
branch. So, nearly right, but that is
not what worries me.

The Treasury goes on to assert that
“while the government continues to support the principle of aligning profits
with value creation, there is a clear need to consider the situations in which
that principle is not being delivered by the existing international tax
framework. In particular, it is important
to consider how the international tax framework is being stressed by
digitalisation and whether it is flexible enough to take account of the
differences in how certain digital business models operate and generate value”.

“Why”, you may ask. It is certainly not clear to me how the
international tax framework is being stressed.
Take, for example, Amazon. As far
as I am aware, Amazon does not have a branch in the UK. It has warehouses here but the international
tax rules exclude warehouse from being a branch – sensibly, because a warehouse
does not create value or by itself generate profits. It simply fulfils international contracts
created in another country. How does
digitalisation make Amazon any different from, say, Marks & Spencer? I do not know if Marks & Spencer has
warehouses in the USA, but if it does, I suspect that the Treasury would be
pretty upset if the USA were to want to seek to attribute a US profit-earning
element to sales made by Marks & Spencer in the USA.

Indeed, the Treasury emphasises that
“the mere consumption of a good or service in a country should not, by itself,
entitle that country to tax the profits of the business providing that good or
service”. But the bottom line is that,
while conceptually it believes that the US, not the UK, should have the right
to tax profits on sales made in the UK by Amazon and Google and Facebook and
other large US corporations, it recognises “the growing public dissatisfaction
that the corporation tax payments of digital businesses are not commensurate
with the value that they derive from the UK markets”.

I am a bit puzzled by this. I have never heard anyone say that they
believe Google or Facebook or whatever “derive value” from the UK market. I read quite a lot but have never read an
article suggesting that such companies “derive value” from the UK market. There is certainly an irrational public
dissatisfaction that they appear to pay very little tax anywhere. Irrational, because under the international
tax framework they ought to pay their tax in the USA, so the US public have the
right to be dissatisfied but it should be no business of the British public how
the USA wishes to tax American corporations.
Indeed, the creation of the USA derives from the fact that its citizenry
in 1776 felt strongly that the UK had no right to charge its corporations to UK
tax unless it integrated the US colonies more firmly into the UK.

The US policy is based on the premise
that the US wishes US corporations to reinvest overseas profits overseas in
order to expand US influence throughout the world. Accordingly it does not seek to tax such
profits until they are brought into the USA.
That is not an unreasonable system; indeed it is the system that the UK
itself decided to adopt a few years ago (with an exception, like the USA, for
passive income such as interest and dividends).
Different countries adopt different tax policies. It is no more unreasonable for the USA to
decide not to tax profits of US groups which are retained overseas than for the
UK to have adopted “one of the most competitive tax systems in the world” by
imposing corporation tax at 19% in the hope that, say, a US company wishing to
establish a branch in Europe would prefer to pay UK tax at 19% in preference to
basing its branch in France and paying French tax at 33.3% instead. No one would suggest that a US company that
is enticed to establish its branch in the UK should have to pay extra taxes on
sales in France because it is “avoiding” French taxes by having its branch in
the UK. Yet that is the logic of the UK
public’s – and I suspect the UK Treasury’s – gripe that the USA chooses not to
tax Google or Facebook.

The Treasury has however come up with an
ingenious argument to justify its desire to tax Google and Facebook. It says that in reality you and I work for
Google and Facebook, so it is our activities in the UK that enable Google to
make money from UK sales, so the UK should tax that money.

So how do we work for Google? I’ll give you an example. I follow baseball. I am a fan of the Chicago Cubs. For a modest annual subscription I can watch
all of the Cub’s games live on my computer by signing in to the website of MLB
(Major League Baseball) who run baseball in the US. I access the Chicago Cubs website via Bing
(which is part of Microsoft) because Lenovo (a Chinese company) installed it on
my computer before I bought it. (I do
not actually use Bing to go to the MLB website because Microsoft Edge refuses
to let me watch baseball, so I use Firefox to do this and Firefox uses Yahoo. However they are all US companies so it does
not affect the principle). When I access
the Cub’s website, it includes a number of adverts, some from US companies and
some from UK ones. Why should Fortnum
& Mason (on the website today) advertise on the Cub’s website? I doubt they can sell much in Chicago. The answer is that they don’t. They advertise on the version of the website
that Microsoft puts in front of me. They
advertise to me because I bought something on line from them a couple of months
ago. Microsoft has incorporated software
in Bing that records what websites I browse.
This software was probably devised in Seattle and I imagine is operated
by Bing from Seattle.

You probably know that already. So how do I work for Microsoft? The UK Treasury’s argument is that
Microsoft’s software enables them to tell Fortnum & Mason that I view the
Chicago Cubs website every day during the baseball season and for a fee that
they will put Fortnum’s advert in front of me every time I do so. Of course Fortnum’s are not interested in
me. But if Microsoft tells them that
100,000 UK people go on baseball websites every day during the baseball season
and they will put Fortnum’s advert in front of them all, Fortnum’s may decide
to advertise these. So, say the
Treasury, every click I make on my browser earns Microsoft the ability to
generate advertising revenue. Because it
is my work clicking that does this, the UK ought to be able to tax the profit
Microsoft makes from Fortnum’s through putting Fortnum’s advert in front of me
(using their US developed software monitored from the USA).

Personally I find this wholly
unconvincing. It is a bit like saying
that Sainsbury’s know what I like to buy because they track this through my
Nectar card. Accordingly if Sainsbury’s
were to open a shop in Chicago, the UK would be entitled to tax part of the
profits that they would make when I shop in Chicago because they have the
ability to target special offers at me when I shop in Chicago in the same way
as they do when I shop in the UK.

The other obvious fallacy is that when I
visit Chicago (as I do every year) I access the Cubs’ website as much as I do
here. Why should the UK be entitled to
tax Microsoft based on clicks that I make in Chicago? I very much doubt that Microsoft
differentiates my Chicago clicks from my London ones when both are made on my
i-Pad. I also doubt that either
Microsoft or Fortnum’s care where I click, so my clicking cannot provide a
rational basis of taxation.

The Treasury also have another odd
concept. Again starting “from the
position that profits are taxed in the countries in which a business has
genuine economic activities” it concludes that “to maintain confidence in the
international tax framework and avoid competitive distortion in local markets,
it is crucial that multinational groups are prevented from being able to
realise profits in low-tax entities that are not justified by local economic
substance. That is partly about ensuring
a robust international transfer pricing framework and pursuing multinational
reforms to address the limitations of that framework in aligning taxable
profits with value created”. Let’s
examine that conclusion. Let’s take
Starbucks. Starbucks does not make much
profit in the UK. The head of Costa
complained a few years ago that Starbucks overpays for its sites, which
probably explains why it makes little profit here. What is profit? It is the difference between sales and
costs. What are Starbucks main
costs? The purchase of coffee, rent and
rates, staff costs, and a payment to use the Starbucks brand and marketing
concepts that were created in Seattle.
Any reasonable definition of profits requires the deduction of all of
those costs. Starbucks purchases its
coffee from an overseas related company.
HMRC need to be vigilant to ensure that it does not overpay for that
coffee. HMRC also needs to be vigilant
to ensure that the price Starbucks in the UK pays to access the Starbucks
intellectual property created in Seattle is not excessive. Its transfer pricing specialists are adept at
meeting both of those challenges. If
Starbucks UK makes a payment to Starbucks US and HMRC are satisfied that the
payment is at the right level, are the UK entitled to nevertheless tax those
payments to the US because, say, the payment is based on the number of coffees
you and I buy in the UK? Most people,
including the Treasury, would say, “Of course not”. So, why should the UK
suddenly be entitled to tax that profit simply because Starbucks USA decides to
sell its intellectual property to Starbucks BVI or whoever? Provided that the UK company is paying the
right price, it is surely irrelevant to UK tax who that price is paid to. How can what Seattle chooses to do internally
damage confidence in the international tax system? It surely can’t!

Of course it is not easy for HMRC to
check whether the price paid for use of the intellectual property is a market
price. But it is no more difficult to do
so if that price is paid to Starbucks BVI than if it is paid to Starbucks
USA. It may be that the Treasury
questions the competence of HMRC. But,
if so, it is HMRC’s paymaster. If the
management of Marks & Spencer was felt by its shareholders to be
incompetent, they wouldn’t say, “We must find a different way to sell our socks
and undies that by-passes the Marks & Spencer stores”. They would tell the Board to replace the CEO
with someone with greater competence to sort out the problem.

I am a bit surprised that the Treasury
do not equate my purchases of coffee from Starbucks with my clicks on
Bing. They look very similar to me. I can only conclude that the Treasury feels
that my coffee purchases are a ridiculous basis for a system of international
taxation. If so, great, but surely my
clicks form an equally ridiculous one?

Monday, December 04, 2017

THE 2,000 Euro BTW Scam?

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THE 2,000 Euro BTW Scam?

I tend to watch Panorama each week. Sometimes they have interesting programmes
but I am not sure why I continue to watch their tax output because it is
invariably misleading and always strongly biased towards the view that everyone
(other than BBC journalists, I assume) is a crook and that privacy (again,
other than for BBC journalists, I assume) is such a wicked concept that anyone
who wishes to keep their private affairs private must be doing so to avoid tax. The producers and journalists also seem to
believe that everything that happens in the UK ought to be taxed here and the
UK’s international treaties that cede to other countries the right to tax their
own citizens and corporate vehicles on some receipts from the UK make the UK
complicit in tax avoidance.

I think it a shame if the government fix
the licence fee at a level which means that the BBC cannot afford to take tax
advice in order to ensure that programmes that they make about tax actually
reflect the tax system. I suspect
however that it is not budget constraints but a culture within the BBC that
integrity is an out-model concept and if a journalist wishes to mislead viewers
in order to propagate a personal biased view, that is OK with them – and
presumably with the BBC Trust too.

Which brings me to “The Billion Pound
VAT Scam” as it was titled. It is not
about a billion pound VAT scam at all.
It is about a few thousand euro BTW scam (the Netherlands equivalent of
VAT).

If you didn’t watch the programme, the
facts are simple.

a)The journalist
went to China to try to find a smuggler prepared to smuggle Chinese goods into
the UK.

b)He didn’t find
one, but did find someone willing to smuggle the goods into the Netherlands.

c)He purchased a small quantity of goods in China and
had them smuggled into the Netherlands.

d)The goods were then transported from the Netherlands
to an Amazon warehouse in the UK. The
journalist (or his editor) did not think it worth mentioning that the EU
fundamental concept of freedom of movement of goods means that goods can freely
be moved from the Netherlands to the UK without any VAT becoming due anywhere –
but that fact would have completely undermined the message that the BBC wished
to convey, so it is fortunate that in a half-hour programme, there was not time
to mention that.

e)The journalist registered a UK business with Amazon
and sold some of the goods on Amazon.

f)Amazon did not ask the business for its VAT
number. There is of course no obvious
reason why they should do so. There is
no obligation to provide one’s VAT number on a sale to a non-business person
and most sales on Amazon are such sales.
In the Budget, the Chancellor proposed to require Amazon to obtain VAT
numbers from everyone who uses their platform, so that perceived shortcoming
should not be a problem after that has been legislated. Whether that is “a good thing” is a matter of
opinion. It obviously seriously damages
the chances of small UK businesses whose turnover is below the VAT threshold
being able to grow. But the Chancellor
clearly believes (not simply in this regard) that killing off small businesses
is a reasonable price to pay to raise a bit of extra tax.

g)The journalist then created another account with
Amazon in the name of a Chinese company and it sold something on Amazon for £5
without charging VAT.

h)Amazon then blocked the Chinese company from selling
anything further for 30 days while it investigated it.

i)The journalist
spoke to the new Chair of the Public Accounts Committee, Labour MP Meg Hillier,
who was predictably outraged at this so-called VAT avoidance – presumably
because she does not know enough about VAT to know that the VAT “avoided” was
0.83p (the VAT on £5) as the supplies by the UK company were well under the VAT
registration threshold but there is a nil threshold where a non-established
trader sells goods in the UK. Of course
she probably should have been outraged that the UK’s membership of the EU
prevents HMRC from taxing movements of goods from EU countries which may
exercise laxer control over imports than HMRC does, but she did not express
such outrage.

j)The journalist
then spoke to a somewhat bemused HMRC official, Jim Harra, who has a very deep
understanding of VAT, told him that he had evaded VAT of a bit over £500 and
handed him a cheque. Jim jovially said
for the camera that perhaps he should speak to the journalist off camera. I hope he did and explained that he had not
evaded anything and owed HMRC less than a quid, but thanks for the cheque
because HMRC always welcomes people wanting to volunteer money to reduce the
national debt.

Of course if the journalist had gone to
his editor and said he wanted to do a programme about how to avoid 0.83p VAT
and please could the BBC send him to China as part of it, the programme
probably would never have got made. If
he had said he wanted to do a programme about how efficient the UK Border
Agency is compared with their Netherlands counterparts, that programme probably
would not have been made either.

But as it is only licence payers’ money
being wasted on misleading propaganda, who cares?

Monday, November 27, 2017

EVASION BY SMALL BUSINESSES

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EVASION BY SMALL BUSINESSES

HMRC commission a fair amount of
research from research companies and in the interests of transparency tend to
publish the reports. Some of these
reports make interesting reading but some don’t. I have been reading one on “Understanding
evasion by Small and Mid-Sized Businesses” and am wondering what, if anything,
HMRC get for their money. The report is
qualitative research which apparently is designed to reveal a target audience’s
range of behaviour and the perceptions which drive it with reference to
specific types or issues. It uses
in-depth studies of small groups of people to guide and support the
construction of hypothesis (per the Qualitative Research Consultants
Association).

The report makes fascinating reading. Unfortunately I have two problems with
it. The first is that I am sceptical to
what extent a tax evader (which I assume to be someone who has been caught out
in having lied to HMRC) is likely to give honest answers to a researcher
probing the reasons for his past dishonesty.
The second is that the key findings do not reconcile with my own
experience. The report identifies four
core types of evader:

a)unthinking
evaders, for whom low level evasion is habitual, and often adopted without
thought,

b)invested evaders,
for whom evasion is seen as an unfortunate financial necessity in order to stay
in business,

c)lifestyle evaders, for whom evasion enables a
life-style otherwise out of reach, which they feel is justified by the taxes
they do pay,

d)systematic evaders,
where evasion is actively considered and integral to the business model.

I have a fair amount of experience of
tax evasion – from the perspective of helping evaders to come clean I hasten to
explain – and I find it hard to fit my typical evader into any of those
categories. This is because under all of
those types of behaviours the cash is either spent or invested in the business,
yet my experience is that while some of the cash may well be spent, most of it
is diverted away from the business and put into some form of savings. If that were not the norm, I doubt that many
tax evaders would come forward and confess their crimes. If a person has not created the wherewithal
to make a financial settlement, it is hard to see how he can make his peace
with HMRC. It is equally hard to see why
anyone should want to tell HMRC that he owes them a large amount of money if he
can see no way in which he can settle that debt.

I am also concerned about what the
report says regarding agents, bearing in mind that the researchers did not
actually talk to any agents and there is an obvious risk that a tax evader may
seek to shift the blame by saying, for example, “my accountant must have known
that I was not declaring everything”.
Thus the report says … “Agents may be unaware of the full extent of
evasion taking place … However where
agents are used primarily to reduce taxes due, a minority may be complicit in
evasion to some extent”. The report
later says, “A minority appeared to engage in evasion on the advice of an agent
(who might for example point out personal expenses that could be put against
the business) … Businesses typically
chose not to inform agents of any activities which were known to be high-risk
evasion, since it is understood that agents would not be comfortable with the
level of risk involved. Ultimately how
the agents was used (and the extent to which that advice was followed) was
determined by the business attitudes and perceptions in relation to tax”. Under a heading of “perceived risk”, it later
says, “Evasion behaviours were believed to be safe on the basis that… agent
involvement may also have provided a sense of security (on the basis that the
agent would not allow anything to appear on record which could cause problems
later)”; and under “Opportunity” it says, “In some cases, agents may have
played a role (whether knowingly or not) in raising awareness of opportunities
or flagging risky behaviours”.

So the report is saying that some of us
actively encourage evasion, others turn a blind eye to it knowing the client is
evading tax, others are comfortable with evasion provided that it is not
documented, and some of us advise clients to change their ways but are
indifferent as to whether or not they accept that advice. Of course the report does stress that it is a
minority and does not speculate on how large that minority may be. Nevertheless it is frightening if the authors
are right in any of these respects. No
wonder HMRC seem to have so low a view of the tax profession if that is what
their outside advisors are telling them.

So what can be done to prevent
evasion? The authors say that “Actions
intended to tackle evasion and improved compliance… could be more visible and
[HMRC should] work harder to cut through the dominant media noise, social norms
and market pressures in order to meaningfully impact on evasion behaviour and “promote
compliance”. They suggest that HMRC
should “increase the perceived likelihood of getting caught”. This could be done by promoting awareness of
HMRC’s capabilities/tools available to catch those who evade. Yes of course HMRC should do this but, as
much evasion takes the form of not declaring cash income or claiming
business-type expenses where the motive is a personal, not a business one, it
is not readily apparent what capabilities and tools HMRC have available to
detect such things. HMRC’s database program, “Connect” is a very powerful tool
for collating information, but it cannot identify either non-information or
motive – other than to the extent that it can highlight differences between
businesses of the same type which can point to large scale evasion but not to a
lot of the fairly petty evasion that the report highlights. For example, it gives as an example taking
home toilet rolls purchased by the business.
I suspect no accountant has ever sought to compare toilet roll purchases
with likely business usage to try to detect pilfering. But I also suspect that Connect cannot do
this either!

Their second recommendation is to
“improve understanding of potential consequences”. Apart from the risk of getting caught, which
seems minimal in relation to low-level evasion, I doubt that many taxpayers (or
rather non-taxpayers) are likely to be unduly concerned about either late
payment fines or media coverage, which are the only examples the report
identifies.

Finally, they tell HMRC to “tap into
what matters, beyond the consequence itself”.
They accept that “there is no silver bullet for tackling evasion” and
tell HMRC, “In order to be compelling, interventions must be personally
motivating, going beyond the immediate impact of the consequence itself, to get
under the skin of what this would actually mean to the business”. They suggest HMRC might play on an
individual’s position in, or perceived responsibility toward the State, the
consequences of the publication of evaders name through localised channels, the
possible impact on employees who may be innocent bystanders to the evasion
taking place but would share in the consequences non-the-less; and most
effective of all, leverage personal ramifications and broader consequences for
the individual and their family. Leaving
aside the fact that HMRC do not have (and probably never will have) the
resources to address every taxpayer individually, it is not clear how HMRC are
expected to identify who is evading tax so as to decide on the right personal
motivation to use. If HMRC could
identify evaders they would not have a need to commission research reports on
understanding evasion.

I hope that HMRC feel that this report
represents value for money. As a
taxpayer, I do not!

Monday, November 06, 2017

WHATEVER HAPPENED TO OPENNESS AND HONESTY?

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WHATEVER HAPPENED TO OPENNESS AND HONESTY?

One of the things for which I will also
remember Gordon Brown and his henchwoman, Dawn Primarolo was the politicisation
of HMRC. Prior to that you could, by and
large, rely on HMRC press releases and other official publications to explain
tax in a factual and honest manner. Now
HMRC seem to see one of their roles as being to preach the political messages
of the government of the day. If that
makes what they say misleading or even inaccurate, the truth is subjugated to
the message.

Since returning from my annual visit to
Chicago at the beginning of September (happy, as the Cubs were doing well and
in fact won the National Baseball League Central for the second year running,
albeit they did not manage to win the National League Pennant this time round)
I have been busy with books, so have rather neglected by blog. The new edition of my Taxpayer Rights book
has now hit the bookshelves and I have nearly finished the updating of my
Property Tax book, so I have had a chance to catch up a bit on my technical
reading. Perhaps it is having to read
several weeks of HMRC press releases together that has concentrated my mind on
just how unhelpful (technically) these have become.

One example is making tax digital (MTD). Both HMRC and the Chancellor announced that
only businesses with a turnover above the VAT threshold will have to keep
digital records and only for VAT purposes, and only from 2019. They reassuringly say that the government
will not wish to widen the scope of MTDFB (for business) beyond VAT before the
system has been shown to work well and not before April 2020 at the
earliest. What is misleading about
that? Well, the main reason that HMRC
want businesses and landlords to keep records digitally is that they believe it
will improve record-keeping. The
quarterly reports they also want are likely to be fairly useless to HMRC, other
than as evidence that the taxpayer is in fact maintaining digital records. So what exactly is the difference between the
digital records one needs for VAT and those one needs for income or corporation
tax. Nothing, other than that the VAT
records also have to record VAT.
Accordingly not widening the scope until the system has been shown to
work well is meaningless. Everyone
(except very small businesses) will be required to keep digital records from
2019, not only for VAT but for other tax purposes too, because all the records
that are needed for income and corporation tax are also needed for VAT. All that has been deferred is the final step
of pushing the button to tell the computer program to send a report to
HMRC. But no-one would guess that from
the HMRC PR.

Or what about employee benefit trusts
(EBT). HMRC say in a blog post of 17
August in relation to the Supreme Court decision in the Glasgow Rangers
Football Club case, “The decision stated any payment made through an EBT should
be considered a taxable income as opposed to a loan”. That is very clear isn’t it? Except it is not what the Supreme Court said
at all. What it said is that earnings
from an employment is income of the employee irrespective of whether it is paid
to the employee or a third party. That
means that where an EBT makes a loan, one needs to consider as a question of
fact whether the payment is earnings or something else, such as a loan. In the Rangers case, the evidence was that
the money was already earnings before it went into the EBT. But it by no means follows that any payment
from an EBT is earnings. And even where
it is earnings, fascinating questions arise as to who is liable for the tax and
whether HMRC may be out of time to collect it.

Then there is the “HMRC guide to tax on
payments for image rights”. This states,
“Employers must ensure that all payments made to their employees comply with
published guidance for the type of payment made”. Surely not!
It must comply with the law. We
have not yet reached the stage where the law is irrelevant and we must do
whatever HMRC tell us to do. Admittedly,
a lot of HMRC employees do seem to believe that we have reached that HMRC nirvana,
as they keep quoting HMRC guidance to us instead of the law. Fortunately, the Courts still believe in the
rule of law. It is also questionable
whether HMRC’s assertion that a payment for the use of an individual’s image
rights is taxable as professional income.
That may well be what they would like the law to be, but it is hard to
see how, if CBW were to pay me to put my photo on their website (which they are
obviously unlikely to do), that is not income from my asset, image rights,
whereas if they pay my company to allow them to use my photo, that then
magically becomes income from exploiting the image right. I appreciate that HMRC would like the law to
be different, but that cannot justify issuing guidance to ignore it.

My latest gripe is HMRC Guidance on
“self-reporting” tax evasion facilitation offences”. This is for companies to report on their own
behaviour where they’ve failed to prevent the facilitation of a tax evasion
offence. Facilitating a tax evasion
offence is now a crime for a company or partnership. To commit the crime, (a) someone must have
actually committed the criminal offence of evading tax, (b) that someone must
work for the company (not necessarily as an employee), and (c) the company must
be unable to show that it had systems in place that would have prevented the
crime occurring. As the only defence is
to show you have systems in place, self-reporting seems wishful thinking. All you can report is that you didn’t install
adequate systems, i.e. you can plead guilty to the offence and hope the Courts
show mercy. Of course what HMRC really
want you to tell them about is the evasion offence. They warn you that it can be a criminal
offence to volunteer incorrect information and suggest you seek legal advice
before saying anything to them. They say
“only provide the information that you already have. For your own safety, don’t try to find out
more information so you can send an e-mail”.
What on earth does that mean?
Unless a person has been convicted or has admitted tax evasion, I have
no way of knowing whether he has evaded tax, because one element of the crime
is his thought process. So how can I ever
self-report unless I first confront the individual with my concerns? The money laundering rules allow me to
question the individual to decide whether I am suspicious that he has evaded
tax, before I need to report that suspicion (albeit, once I or someone has
reported it, I can no longer risk tipping him off that a report has been
made). And what does “for my own safety”
mean. I am hardly going to seek further
information from someone I think is going to get violent and, although over the
years I have met many people who have evaded tax (because part of what I do is
to help them to confess to HMRC), I have never had a situation where I feared
for my safety. And whatever prompted
HMRC to decide to allocate resources to issue non-statutory guidance on
something that well-informed companies are unlikely to do and to word that
guidance in such a way as to deter people from actually coming forward? It’s good to know they have the resources to
waste!

Wednesday, October 25, 2017

DON'T BLAME SDLT

Is stamp duty (as the popular Press like
to call HMRC) really the problem that prevents young people from getting on the
property ladder?

The effect on the average home of the
SDLT increases on 3 December 2014 is:

Old
SDLT New SDLT

£250,000
house 1% 1%

£500,000
house 3% 3%

£750,000
house 4% 3.66%

According to the Nationwide House Prices
Index, house prices over the period since December 2014 have increased as
follows:

UKLondonLondon
Metropolitan

Average price in Sept 2017 210,982 471,761 365,554

Average price in Dec 3014 189,002406,730301,612

Increase 21,980 65,031 63,942

Percentage increase 11.63% 15.99% 17.49%

So what is preventing young people
getting a foot on the ladder? The retail
price index stood at 257.5 in December 2014 and is 275.1 now, an increase of
6.8%. I would say it is inflated house
prices rather than SDLT!

Perhaps a more intriguing statistic is
that the Land Registry say that 30-40% of all housing transactions in September
were for cash (25% in London). Not pound
coin cash of course, but purchases without a mortgage. It is improbable that young people anxious to
get on the housing ladder will have saved 100% of the prospective purchase
price before trying to climb on. It is
equally unlikely that the Bank of Mum & Dad will have done so. That suggests that 30-40% of purchases are
either purchases by investors or possibly people who have sold their house,
moved temporarily into rental accommodation and are now ready to buy
again. As there seems to be a consensus
that house prices have largely levelled off and are as likely to fall as the
rise much further, this would be an odd time to re-enter the market though.

This suggests that the real problem for
young people is that the government are not prepared to reduce the attraction
of UK residential property to investors.

The three percentage points SDLT
surcharge is not much of a deterrent, i.e.

SDLT by first time buyerSDLT
with surcharge

£250,000 house
1% 2.5%

£500,000 house
3% 5.25%

£750,000 house
3.66% 6.17%

The restriction of loan interest relief
to the basic rate is unlikely to have much effect. It clearly has no effect to those who buy
without needing to borrow – probably mainly foreign investors – and the
indications to date is that landlords are not rushing to sell up. Either their rents are sufficient to absorb
the extra tax costs or they are looking to incorporate (often unwisely) because
the restriction does not apply to investment by companies, only that by
individuals and trusts.

It is an odd state of affairs where the
government (the Cameron/Osborne government that is, not the May/Hammond one)
seems to have decided that UK resident individuals looking for somewhere to
live need to be deterred from competing with corporate landlords, many of which
are controlled by rich overseas residents.

It is hard to see what the government
can do to help the young. The tiny bits
of extra finance that have been made available through Help to Buy ISAS and
through the Help to Buy house Purchase Scheme is a drop in the ocean. There seems to be no political appetite to
curb investors, which is clearly the only real solution to young people’s
problem.

Wednesday, February 22, 2017

I THOUGHT THAT I UNDERSTOOD REASONABLENESS

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I THOUGHT THAT I UNDERSTOOD REASONABLENESS

Some years ago, I was on the
Consultative Committee for the reform of the tax tribunal system. I was the lone representative of the
accountancy profession. I remember
sitting around a table with about 14 lawyers and a couple of other non-lawyers
and bemoaning the impending demise of the General Commissioners. For younger readers I should explain that
these were volunteers who gave up their time to settle tax appeals
locally. When asked by Stephen Olive
(later Sir Stephen) who chaired the Committee what was good about the
Commissioners, I said that they applied commonsense. He retorted, was I suggesting that lawyers
could not apply commonsense!

The recent decision of Judge Christoper
McNall, a barrister, whose website tells me that he aims “to bring a robust and
practical approach to all my clients’ cases”, in the First-tier Tribunal case
of Coomber v HMRC, seems to me to prove my point.

Mr Coomber owed income tax for
2015/16. He sent a cheque to HMRC on 2
February 2016, which was received by them on 4 February 2016. They banked the cheque and it bounced. No one knows why it bounced. Mr Coomber had sufficient funds in the
account to meet it.

Mr Coomber’s accountant spoke to HMRC on
1 March 2016 and were told that his tax payments were up to date; he owed
nothing. In early March Mr Coomber
received his bank statements and noticed that the cheque had not gone
through. It is not clear what happened
next. I assume the accountants spoke to
HMRC again and this time were told that they had not received payment. Apparently when they spoke to HMRC on 1
March, HMRC had not got around to updating their records. Mr Coomber eventually sent HMRC a replacement
cheque on which HMRC banked on 17 March.

Where tax due on 31 January is not paid
before the end of February a 5% surcharge applies unless the taxpayer has a
reasonable excuse for the late payment.
The issue for Judge McNall to determine was whether Mr Coomber had a
reasonable excuse for not having paid his tax by the end of February in
circumstances where he had sent HMRC a cheque at the beginning of February,
knew that he had sufficient funds in the account to meet it, had not been told
by HMRC that the cheque had not been honoured, indeed, had in fact been told by
HMRC that he had duly paid what he owed, and had no knowledge that what HMRC
had told him (through his accountants) was incorrect until it was too late to
avoid a surcharge by sending a fresh cheque.

Do you think that in that combination of
circumstances Mr Coomber had a reasonable excuse for paying his tax late? I certainly do. But reasonableness is a subjective concept and
what matters is what Judge McNall thinks and he thinks that Mr Coomber acted
unreasonably.

So what would a reasonable person have
done in Mr Coomber’s circumstances?
Should he have called his bank every day to check that it had
cleared? Personally I think that would be
an odd thing to do. If everyone did it,
I would expect the banking system to collapse.
But that is precisely what Mr McNall believes that a reasonable person
would have done. “Santander offers
telephone banking, and his bank statement gives a Freephone (0800) number at
which the bank could be contacted. No
reason is put forward why Mr Coomber, having made this payment by cheque, could
not have checked with his bank to see if it had been cleared. I do not see any reason why he should not
have done so”.

Personally I think it would have been a
very odd thing to do. If I send someone
a cheque and it bounces, I would expect the recipient to contact me very
quickly to demand an explanation. Isn’t
that what normally happens? Well,
apparently not in Mr McNall’s commonsense world. “Mr Coomber advanced the proposition that it
is “normal practice” if a cheque is dishonoured for some reason for the
creditor (here HMRC) to contact the payer to inform them of the same. But there is no evidence or other material
before me as to this alleged practice and, if it exists, whether it is indeed
“normal” as alleged and, if, even if it is normal in other contexts, whether it
applies to HMRC”.

I find that incredible. It needs evidence to indicate that if a
cheque bounces it is normal for a creditor to contact the debtor and demand his
money? What sort of a world does Mr
McNall live in? I must admit though,
that I like the suggestion that even if that were to be normal, it is not
reasonable to assume that HMRC will act like any normal person; one can rely on
what normally happens only if you can show that HMRC is staffed by normal
people!

But probably Mr McNall had to except
HMRC from normality because it had told him that when a bank bounces a
taxpayer’s cheque, it simply throws it away!
Nowadays I do not have any day to day dealings on behalf of clients with
HMRC, but back in the days when I did my recollection is that if a client’s
cheque bounced, HMRC were on the phone demanding an explanation straight
away. Has the ability to impose
penalties for late payment resulted in HMRC no longer bothering to seek to
collect unpaid tax, except tardily? I
talk to a lot of accountants and while many believe that HMRC use penalties to
increase the headline amount of what they collect, none has ever told me that
they don’t try to collect at all.

Mr McNall clearly thought Mr Coomber
should not have paid by cheque. “Whilst
he was entitled to do so, he was nonetheless, in doing so, taking a risk that,
if anything went wrong with the cheque, or (for example) if it went astray in
the post, payment would not be made in time”.
He said that Mr Coomber should have used “some other means (for instance
BACS, Faster Payment or Direct Debit) which would have given him the immediate
knowledge and assurance that the payment had been safely received”. Would it?
I pay my tax electronically. I get
immediate knowledge that it has left my account, but I have no knowledge that
it has reached HMRC’s account or even that it has left my bank. I still take the risk that the bank might
make an error.

Mr McNall was also clearly upset that
no-one could tell him the full facts. In
particular he was annoyed that he did not have a copy of the cheque
itself. Not annoyed with HMRC for
destroying it, of course. Annoyed that
Mr Coomber had not said whether or not he had asked his bank whether, as part
of its ordinary cheque-clearing processes, it scanned and kept a copy of the
cheque which it was dishonouring.

This appeal was dealt with as a default
paper case, i.e. Mr McNall decided the case without a hearing but by simply
reading the taxpayer’s notice of appeal, HMRC’s statement of case and the
taxpayer’s comments on it. That meant Mr
Coomber and his accountants had to guess what Mr McNall would expect to be
evidenced and what he would be likely to himself know from his own knowledge of
life. It also meant that Mr McNall had
to make guesses to fill in gaps in what he had been told in order to write his
decision.

The idea of default paper cases was not
simply to save Tribunal time. It was
felt that some taxpayers would forgo their appeal rights rather than have to
appear before a Tribunal but would pursue an appeal if all they needed to do
was write a letter setting out their case.
This case perhaps demonstrates the downside of the default paper
procedure!